Fin 325, 11/23/2020 QUIZ 4—in class version
30 pts. total
You will get this quiz paper back. Please insert your note page(s) behind this page when done. You MUST enter all your responses in writing (below) AND electronically in your iClicker. (Remember to scroll forward to the next question, after entering each response.)
True/False (2 points for each question, 6 questions, 12 points total)
Indicate whether the sentence or statement is true (write “T” below) or false (“F”). Choose “A” on your iClicker for True responses and “B” for False responses.
The point of this table was that CLGX’s valuation comparables were significantly less than peer firm valuation comparables. This implies the current CLGX management is underperforming.
Multiple Choice (3 points for each question, 6 questions, 18 points total)
Identify the letter of the choice that best completes the statement or answers the question. For numerical problems, choose the response closest to the number you calculate.
|a.||A new product line started with future follow-on investments available||d.||A five-year lease that allows the lessee to sublet the leased property.|
|b.||A truck fleet outfitted with engines capable of running on five various types of fuel||e.||A patent developed on a new process of slicing bread|
|c.||The articles of incorporation amended to allow for stock splits and reverse stock splits|
|a.||The greater uncertainty will cause the price of the call option to increase. The higher price of the stock will cause the price of the call option to decrease.||d.||Both changes cause the price of the call option to decrease.|
|b.||The greater uncertainty will cause the price of the call option to decrease. The higher price of the stock will cause the price of the call option to increase.||e.||It is not possible to tell the impact on the price of the call option, given the information given.|
|c.||Both changes cause the price of the call option to increase.|
|a.||Stock price increases.|
|b.||The exercise price increases.|
|c.||The stock price volatility decreases.|
|d.||The time to maturity decreases.|
|e.||None of the other choices results in an increase in the value of a put option.|
You can assume that the time to maturity of this option is exactly 6 months. The volatility is 0.7399, i.e. 73.99% per year. The risk-free rate, on 6-mo. T-bills, is 0.102% per year. (The z-table is incorporated into the end of this problem, for your convenience.)
What is the NPV of the new product line (including any tax shields from leverage)?
What is the Free Cash Flow in Year 6 for team Leo?
Finance 325, Fall 20, Quiz 4
Need to add depreciation expense.
buying a put option.
C_EX + PV(EX) = P_EX + S
C_EX + PV(EX) -S = P_EX
MFL 20A #4
She should trade the options to someone else who will value the time value remaining on the option. She will thus earn more money from trading the options as opposed to selling the options.
To replicate a CALL option, an investor would need to buy delta shares of the underlying stock and then engage in risk-free borrowing.
To replicate a PUT option, an investor would need to SELL delta shares of the underlying stock and then engage in risk-free lending.
MFL 22A, #4
MFL 22A, #9
The calculations come close to mirroring the values in the table. In fact, the “IV” column, from the chart that was given, is calculated based on inferring what level of volatility is consistent with the call option price. (“IV” stands for “implied volatility”.)
For reference, here is the full quotation:
WACC = (1 / 1.4)(11.3%) + (.4 / 1.4)(5%)(1 – .35) = 9%
VL = 0.75 / (9% – 4%) = $15 million
NPV = –10 + 15 = $5 million
note that t_c (from income statement) is 22%
FCF = 9.17*(1-0.22) – 2 + 3.27 – (-0.58) = 9.0
Note that you found the last 3 numbers from the Statement of Cash Flows (SOCF). Also note that the “Inventory Reduction” listed on the SOCF ends up increasing FCF.
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